Lessons from Private Equity investing for public markets

– David Wanis, June 2025

There are many different investment approaches that work over the long term. Understanding them can help investors improve their own investment process. Successful venture capital investors have some useful ideas for early stage listed company investors. Short biased funds (which are all but extinct today) have methods long only investors can adopt to improve their hit rates and avoid big losers. And Private Equity (by which in this note we mean Levered Buyout Funds) – despite all the opinions on leverage, fees and the comparability of quoted returns – seem to know a thing or two about management incentives and driving operating outcomes as control investors.

One approach to executing the private equity (PE) playbook in public markets is to acquire a substantial but minority shareholder seat at the table of a company in need of some new incentives and improved operating performance (without paying a control premium – more on that later) and work closely with the board, management and possibly other shareholders. Investment returns are pursued through suggesting operating improvements (higher EPS growth), hopefully a multiple re-rating (as the market recognizes and rewards the structural improvements delivered), and possibly an exit for a control premium to a whole business buyer (strategic or actual PE). That is the theory anyway. It is less clear if this works in practice from the position of a minority shareholder. The reality often highlights how boards and management teams have different (and very lucrative) incentives and are not as willing to abandon them as activist shareholders assume.

There is another way of doing this – identify companies already willingly executing the successful PE playbook over a long period of time, without having to convince a board or management of the merits. We have identified seven Australian Securities Exchange (ASX) listed companies that have been doing just that for decades and have delivered the investment returns to go with it. We call these the quiet compounders of the Australian market. The seven companies are Brickworks, Eagers, EVT Ltd, Harvey Norman, Premier Investments, Seven Group and W H Soul Pattinson & Co.

These seven companies share the characteristics of being significantly founder controlled and have a track record of being listed on the ASX for at least 30 years. The 30-year test means there are some similar companies who have yet to rack up the decades needed to be included in this particular group, but investors can consider as potential future winners following the same playbook.

Despite the idea that public equity investors are permanent capital with an infinite time horizon, the reality is boards and management feel pressure to deliver on every quarterly period, willingly giving up long term value accretive opportunities if they entail short-term risks.

Putting aside the willingness to take on leverage, arguably private equity exists because they believe with control (which can in turn solve co-ordination, governance and incentive issues) and being judged on the destination rather than the journey they can commit to long term value accretive decisions.

Below are some of the attributes our quiet compounders share with PE.

• Long term horizon and alignment: the compounders commit to value adding long term investments – even when unpopular. These decisions are made not to maximise a consultant approved remuneration scheme that creates faux alignment. The payoff comes from the major shareholders’ hard dollar alignment through owning significant equity and being exposed to both the downside and the upside of their investment decisions.
• Willingness to be flexible and unpopular: Many times, investment decisions are not popular. They are not fashionable and considered outside the current organizational scope. Founders of these companies are comfortable with this position if the long-term returns are there. These companies invest in their core operating markets, in adjacencies, in other parts of the capital structure and sometimes across multiple industries. Interestingly most of them stay geographically close to home.
• Deep operational experience and industry knowledge: Most quiet compounders stay within a circle of competence, and here they operate with best-in-class industry expertise and execution track records. This helps not only with day-to-day delivery against financial goals, but in identifying M&A opportunities and capturing synergies should they be real and available. Deals are done to add value, not to just get bigger so the CEO gets paid more. Risks are sometimes taken outside the core, but these are often sized appropriately.

Source: Longwave Capital Partners

There are a couple of very important differences to Private Equity we observe:

• Investing earlier in the company lifecycle: One thing we have observed as small cap investors for whom company lifecycle is an important consideration, is that private equity seems to be unusually attracted to very mature industries. This makes sense if you need to pay a lower multiple (growth stocks don’t tend to trade at sub 10x EBITDA) and if you want to add 4-6x debt into the capital structure as lenders are more willing to lend against stable cash flows. But the headwinds from a mature industry make operational gains and M&A moves harder to convert into sustainable EPS growth. Our quiet compounders seem to be more comfortable investing in high growth and mature growth industries, with some of their smaller, riskier bets being in the young growth phase.
• More conservative approach to debt: Having operated through many cycles, most quiet compounder boards have a healthy respect for the risk that comes with excessive financial leverage. The payoff function is different to private equity (equity vs carry), but the higher growth life cycle focus may also result in a lower need for debt in generating 15% p.a returns to equity.

While the operating businesses may have a similar-to-private-equity corporate play book, there are several important advantages for investors in the public market version.

• Full transparency due to ASX listing disclosures: say what you will about the benefits of being private, we can’t think of too many investors who, when given the choice, wouldn’t want more information about their investments. All our quiet compounders meet the full disclosure and governance requirements of the ASX and provide regular updates and detailed financial accounts.
• Daily pricing AND liquidity (if you need it): Perhaps the lack of liquidity protects investors from their own behavioural flaws. We were reminded of this only two months ago as the April drawdown resulted in the temptation to do harm to your own investments. Assuming investors have long-term investment goals and the discipline to stick with them, the benefit of liquidity means you can access your investment and convert it into cash at any time of your choosing. Liquidity is an option that has real value, and partly why private investments need to realise higher returns as compensation for being illiquid, all other things being equal.
• Control Premiums: In theory, private equity investors must pay a control premium when they buy a new investment and sell at a non-control or minority price into the public market if they exit via IPO (or find another PE or strategic buyer willing to maintain the control premium to take over the whole business). For investors entering and exiting our quiet compounders, there is no control premium involved. There is an existing control investor you are investing alongside, and that is part of the deal.

Yes we are dealing with survivor bias here, but that is also true of the best performing investments anywhere you look. The fund manager who survived. The private equity sponsor who survived. The startup who survived to become a unicorn.

The average 30-year return for these seven companies was 16.3% per annum +7% p.a ahead of the All Ordinaries Accumulation Index over the same period. Sometimes when looking at long-term numbers, the performance is heavily influenced by extremely high returns when assets were small early on, and lackluster performance since. Not this group. The past five years average was +21.7% p.a (+9.7% p.a vs index). The past ten years was +15.1% p.a (+6.0% p.a vs index) and the past 15 years was +16% p.a (+6.8% p.a vs index).

The difference between 9.3% p.a and 16.3% p.a is the difference between A$100,000 becoming A$1.4m in 30 years and becoming A$9.3m over the same time horizon.

As a reminder, 10-year private equity returns to 2015 had a starting global AUM in 2005 of US$0.6T. 10 years to 2025 had a starting global AUM of US$1.6T in 2015. The current global AUM is US$4.7T (Bain). We suspect comparison of vintages get harder not easier from here now the industry is almost 8x as large as 20 years ago. We haven’t shown any private equity returns here as we are unsure we would be comparing apples-to-apples against our public equity returns anyway.

We vividly recall the rise of the hedge fund industry earlier in our careers. Global AUM had gone from around US$200bn in 1995 to almost US$2T by 2007 (10x) with returns of almost 13% p.a over that time (Credit Suisse Hedge Fund Index). Having successfully sidestepped the bear market of 2000 – 2003 hedge funds cemented their place as a new asset class with bond like risk and equity like returns. Assets under management still rose another 50% to US$3T from 2007 to 2017 but returns fell to a volatile 3% p.a over this decade – delivering bond like returns with equity like risk.

As investors, we have owned most of the names on the quiet compounder list at some point. We currently own three of them (Harvey Norman, Brickworks, Premier Investments) and the qualities they possess – long term time horizon, alignment, willingness to be flexible and unpopular, deep operational experience, industry knowledge, a conservative approach to debt and investing in the growth phase of the life cycle – are shared across many other companies in our portfolio, even if they have yet to notch up 30 years of listed market performance.